Operational Efficiency of Chinese Commercial Banks: An Empirical Analysis Based on a Multi-stage Cooperative Network Data Envelopment Analysis Approach
ZHU Ning, ZENG Hengyu, YU Zhiqian
School of Economics and Statistics, Guangzhou University; School of Economics, Xiamen University
Summary:
In recent decades, the Chinese banking sector has experienced substantial and rapid growth, especially in terms of total bank assets. However, there remains a gap between the current situation of commercial banks and the requirements for achieving the high-quality development of the banking system in various respects, including innovation ability and service quality. This situation suggests the presence of deep-seated problems related to structural imbalances and financial resource misallocation in Chinese commercial banks. Therefore, it is necessary to evaluate the performance of the internal operations of banks using a scientific approach. The conventional data envelopment analysis (DEA) approach treats the operational processes of commercial banks as a “black box,” lacking the capability to reveal complicated internal operational processes by which inputs become outputs. This limitation persisted until the development of the network DEA approach. Although numerous studies have used the network DEA approach to examine the efficiency of Chinese commercial banks, they typically adopt independent or relational constraints when evaluating the relationship between successive sub-stages. These approaches fail to capture potential conflicts or tend to generate the wastes of intermediates. In addition, most of the studies decompose the internal operational structure of commercial banks into two sub-stages, raising funds and using funds, or only focus on a single type of business, such as assets, liability, and off-balance sheet activities. Although a simplified model offers advantages in terms of calculation and operability, it may not be able to fully and effectively evaluate the operational efficiency of commercial banks that have complex operational structure in reality. To fill the aforementioned research gap, this paper uses a cooperative additive slacks-based measure (SBM) network DEA model that effectively integrates the background of financial structural reform. We include 108 Chinese commercial banks from 2013 to 2019 as samples to evaluate their internal operational efficiency based on the perspective of structural decomposition. The operation process of a commercial bank is divided into four sub-stages: using initial funds, raising funds and conducting intermediate business, using funds, and generating profits. The last stage is further subdivided into two parallel stages, accounting for the generation of interest income and other non-interest income, respectively. Our findings reveal the presence of structural imbalances in the operation process of Chinese commercial banks, including uneven efficiency in each sub-stage and uncoordinated operation in adjacent sub-stages. Specifically, commercial banks perform well in two stages, using initial funds and using funds, but require enhancements in the profit generation stage. In terms of the efficiency of input, output, and intermediate products, the input efficiency of fixed assets and the output efficiency of non-performing loans and other non-interest net incomes are lower. The lack of coordination between the sub-stages of banks leads to misallocations of employees, branches, deposits, earning assets and other factors. Comparing the efficiency of various types of commercial banks, we find that foreign banks exhibit the highest overall efficiency, with relatively balanced efficiencies across sub-stages. However, the efficiency of individual sub-stages fluctuates considerably. Although large state-owned banks perform well in the initial fund raising stage, this is at the expense of generating redundant employees and branches. Moreover, joint-stock commercial banks allocate more resources to traditional business, resulting in some redundancy in deposits and earning assets. Further, our scale efficiency analysis reveals that the scale efficiency of large state-owned banks is lower than that of other types of banks, with a downward trend observed during the study period. On the basis of the findings, we propose three policy implications. First, with the deepening of financial structural reform, commercial banks are encouraged to improve their operational efficiency, weak business links, and financial supply capacity. Second, through scientific and technological empowerment and platform construction, the current operational structure of commercial banks can be reformed by optimizing intermediate products and controlling the cost of fixed assets and the risk of non-performing loans. Such reforms would enable the rational allocation of resources and enhance the stability of banks' internal structure. Third, to contribute to financial structural reform, different types of banks should tailor their efforts to optimize their operational structures and improve operational performance based on their specific shortcomings. Encouraging resource-sharing among different types of banks to facilitate mutual learning and improve overall efficiency, sub-stage efficiency, and performance stability is recommended.
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